Old Problems New Solutions #idea

I really want to use Mathematica.

But our current solutions are fast and work.

We don’t need Mathematica for this problem.

If we want to use Mathematica, what we need is a new problem.

A problem that adds to the solution space of our current problem from a new/different perspective.

We need to build a tool chain not of redundancy but of dimensionality around the problem,

–h

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March and Since Inception P&Ls

Vertical Solutions Forecast
P&L’s for March and Since Inception

 Quick Summary

+1.4% March

 Current rate of return: +17.5% un-leveraged

 Profitable 6 of last 6 months, profitable 9 of last 10 months

 Drawdowns continue to be minimal

 In October 2013, we developed an algorithm called Edge which has improved our results

Vertical Solutions Forecast, March 2012 – March 2014, Total Return

 March P&L

 

Vertical Solutions Forecast w/ Edge, October 2013 – March 2014

Gross 8.7%
   
Avg/mo. 1.5%
   
Avg/yr 17.5%
   
% Profitable 100%
   
Std Dev/mo 0.4%
   
z 8.82
   
Sharpe 3.6

 

 

Vertical Solutions Forecast, March 2012 – March 2014

Gross 16.9%
   
Avg/mo. 0.7%
   
Avg/yr 8.1%
   
% Profitable 76%
   
Std Dev/mo 1.2%
   
z 2.80
   
Sharpe 0.6

 

 

Monthly Returns, March 2012 – March 2014

 

 

Date %/Contract
Mar-12 2.1%
Apr-12 0.9%
May-12 1.7%
Jun-12 2.1%
Jul-12 -0.1%
Aug-12 0.6%
Sep-12 0.2%
Oct-12 0.9%
Nov-12 0.1%
Dec-12 0.0%
Jan-13 -0.5%
Feb-13 -0.3%
Mar-13 2.6%
Apr-13 -1.9%
May-13 -2.4%
Jun-13 1.5%
Jul-13 0.3%
Aug-13 0.7%
Sep-13 -0.3%
Oct-13 1.9%
Nov-13 1.6%
Dec-13 0.9%
Jan-14 1.0%
Feb-14 1.9%
Mar-14 1.4%

 

Notes:

We continue to focus on using and understanding Edge

We are working on extending the time frame of trades

Results are live trades, not a simulation

*A Sharpe Ratio on 6 months results is still a bit silly

 

—h
Henry Carstens
503-701-5741
carstens@verticalsolutions.com
www.verticalsolutions.com

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Patience #idea

In an increasingly ADD world, I wonder if patience isn’t it’s own edge,

–h

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Forecast, Quick P&L’s – Feb and To Date

Forecast, Quick P&L’s, February and To-Date

 Quick Summary

 Annual rate of return: +17.6% (un-leveraged)

 In October 2013, we developed an algorithm called Edge which helps us quantify the opportunity in a trade

 Since the development of Edge, the rate of return of the Forecast has risen to +17.6% per year and our trade-by-trade standard dev has dropped by 72%

Forecast P&L, 2012-p

Forecast P&L

 

 

Edge P&L, Monthly, October 2013-Feb 2014

Gross

7.3%

Avg/mo.

1.5%

Avg/yr

17.6%

% Profitable

100%

Std Dev/mo

0.5%

z

7.26

Sharpe*

3.2

Forecast P&L, Monthly, March 2012 – Feb 2014

Gross

15.5%

Avg/mo.

0.6%

Avg/yr

7.8%

% Profitable

75%

Std Dev/mo

1.2%

z

2.58

Sharpe

0.5

Monthly Returns, 2012-p

Date

%/unit

Mar-12

2.1%

Apr-12

0.9%

May-12

1.7%

Jun-12

2.1%

Jul-12

-0.1%

Aug-12

0.6%

Sep-12

0.2%

Oct-12

0.9%

Nov-12

0.1%

Dec-12

0.0%

Jan-13

-0.5%

Feb-13

-0.3%

Mar-13

2.6%

Apr-13

-1.9%

May-13

-2.4%

Jun-13

1.5%

Jul-13

0.3%

Aug-13

0.7%

Sep-13

-0.3%

Oct-13

1.9%

Nov-13

1.6%

Dec-13

0.9%

Jan-14

1.0%

Feb-14

1.9%

Notes:

 We continue to focus on using Edge to identify trades and understanding when Edge gets overwhelmed by real world events

 That should lead to more and better opportunities and continued low standard deviation

 *A Sharpe Ratio on 5 months results is still a bit silly

—h
Henry Carstens
503-701-5741
carstens@verticalsolutions.com
www.verticalsolutions.com

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On Testing #idea

“This, too, must be tested.”  –Dr. Niederhoffer

I used to think the emphasis was on ‘This’

But it’s not – it’s on ‘too’

Because one needs to test so many things so many times (think 10,000 hours of testing) that the tests and their variants flow. Almost instantly.

Because on Friday at 14:50, you only have 10 minutes to get it right.

And 10 minutes has to be enough given the Axiom of the Small Edge.

–h

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5-3-1 #idea

5-3-1

I use a program called 5-3-1 in my strength training which I find remarkably effective because it drives me to improve each week.

Here’s a way to use (a complete bastardization of) the 5-3-1 program to find and develop new trading edges:

Week 1, Foundation

 Identify and test 5 new trading ideas

Week 2, Darwin 1

 Take the 3 most successful test results from the 5 ideas and refine/mutate/develop  them further

Week 3, Darwin 2

 Take the most successful idea and refine/mutate and further develop it

Week 4, De-load, Analyze,

 Review the results and record them (important!)

Analyze the results and the process. Improve.

 Repeat

 

This should put your trading edge development on a continuous and sustainable path. By the end of the year you should have developed 12 new ideas and learned a ton (you’re going to have to stretch to keep this going but new, and old, frontiers abound).

Even better, by forcing yourself to work on your creativity, new ideas will come easier and faster.

 

–h

 

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You Can’t Step Into the Same River Twice #idea

“You can’t step into the same river twice.”

A flowing river constantly changes its contents: the waters in front of us move on and others replenish them.

Heraclitus says the cosmos functions in the same way way: new things come into being, others die, and everything is transformed.

Look around:

• New laws are enacted and others are no longer enforced.

• New styles of expression become fashionable and others are relegated to the dustheap.

Thus, we need to continually update our outlook and make sure that the strategies we employ to the problems and opportunities before us.

For example, I once read about a group of Russian immigrants in Los Angeles who had the tradition of celebrating New Year’s Eve on the afternoon of December 30th.

A newspaper reporter asked them, “Why are you celebrating the arrival of the New Year thirty-six hours before everyone else?” One of them, a man in his late sixties replied, “When we were growing up in the Soviet Union, we were very poor, and we found that it was a lot cheaper to get a band on the afternoon of the thirtieth.”

The curious thing is that these people had prospered in America and they could have easily have afforded lavish entertainment on New Year’s Eve, yet they continued to celebrate it on the previous afternoon.

The point is: once a rule, pattern, or behavior is firmly established, it’s very difficult to eliminate even if the original reason for its generation has gone away.

Remember: every right idea is eventualy the wrong idea.Innovation means not only generating new ideas, but escaping from obsolete ones as well.

When examining an existing rule, program, or policiy, it’s always a good practice to ask, “Why did this rule come to be?” Then follow this question with, “Do these reasons still exist?” If the answer is “No,” then eliminate the rule.

— What assumptions should you update?

— What’s obsolete and can be discarded?

— How can you freshen your outlook?

From Creative Whack Pack Card of the Day; highly recommended.

 

Nowhere more true than our industry – I estimate the current rate of change at 15% here,

 

–h

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Quick P&L’s, January and To-Date

Quick Summary

 Market Stress has helped

 Our Trend Day predictions are getting better

 We combined Market Stress and a Trend Day prediction to identify the recent market turn

 Since Market Stress the Forecast set-ups have been correct 77% of the time

Since Market Stress, October 2013-p

market stress pnl jan

Market Stress, Oct 2013-p
   
Gross $4,431
   
Avg/mo. $1,477
   
Avg/yr $17,724
   
% Profitable 100%
   
Std Dev/mo $487
   
z 5.25
   
Sharpe 3.0*

Since inception, 2012-p

Forecast PnL

All, 2012-p  
   
Gross $87,316
   
Avg/mo. $3,796
   
Avg/yr $45,556
   
% Profitable 74%
   
Std Dev/mo $11,636
   
z 1.56
   
Sharpe 0.3

Quick Conclusion:

We’re getting better at understanding and using Market Stress and Trend Days

That should lead to more and better opportunities – especially in longer timeframes

*A Sharpe Ratio on 4 months results is a bit silly

—h
Henry Carstens
503-701-5741
carstens@verticalsolutions.com
www.verticalsolutions.com

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Probability of a Backtest Overfitting #idea

This paper develops a methodology for determining if an historical backtest overfits the data.

 

–h

 

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The First Law #idea

“This, too, must be tested.”
–Dr. Niederhoffer

The First Law.

The Guiding Principle.

 

–h

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